Time to Dust Off the Clubs

If you're like millions of avid golfers, now's the time to think about dusting off the clubs, doing a few stretching exercises, and getting that swing grooved. The biggest major tournament of the year, the Masters, is only a few weeks away. And across a wide swath of northern states, the snow is melting, revealing greens just waiting for a well-struck 9-iron.

Now that you're in the mood for a round of nine, is this also the right time to consider adding a golf-related company to your portfolio? As Selena Maranjian explained a few weeks ago, the industry has been stuck in a sand bunker for most of the decade. Technological improvements have enticed hardcore players to upgrade equipment, but the total number of people actually playing the sport is declining. There are a few companies making solid contact on the ball, but Foolish investors need to approach this apparently slumping market carefully, lest they whiff on their stock selections.

Fore!
Nike is much more than a golf company, of course. The upcoming Summer Olympic Games in Beijing, and the European Football Championships, will be big news for this brand. Management wowed investors with recent third-quarter results and its confident predictions of continued growth, despite slowing consumer spending on discretionary items.

The company has strengthened its presence in the golf business consistently over recent years. Although it doesn't disclose golf revenue as a separate segment, analysts estimate those sales could exceed $600 million annually, including shoes, apparel, and footwear. Of course, it doesn't hurt to have Tiger Woods, the world's most recognizable golfer, touting your products. Nike looks to continue its winning ways, prompting Motley Fool CAPS players to award the stock five stars.

Hole in one
Fortune Brands owns the Titleist and Cobra brands, but it also sells a variety of other products that could come in handy on the green (including Jim Beam bourbon). Golf represented about 16% of the company's revenue in 2007 -- its fastest-growing segment. Results last quarter looked like a three-putt -- spirits and golf were solid, but operating profits in home-related products fell nearly 60% because of the downturn in the housing market.

Recent news includes a potential acquisition of the Absolut vodka brand, and Titleist's extension of its technological dominance of high-end golf balls into more moderately priced offerings. While Fortune Brands can experience boom and bust cycles, at current levels, the stock is beginning to look increasingly attractive.

Can Aldila make the putt?
Aldila is a wildcard stock in my view. No serious golfer questions the company's superiority in graphite-shaft technology -- all the leading driver manufacturers feature Aldila shafts. But can the company still grow revenue in a declining market? The newest twist of interchangeable shafts may give Aldila a revenue boost, but it looks more like a novelty to me than the next big thing. The average golfer has trouble finding the fairway with one shaft. Who really needs three?

Going deep
In PGA tour lingo, Callaway "went deep" last year, scoring a 10% sales increase and more than doubling profits. It didn't hurt that Phil Mickelson dumped Titleist in favor of Callaway equipment, and the company is making strong inroads abroad -- growing its international business to provide more than 50% of worldwide revenue. But the long ball for Callaway is automation in its club-making facilities, which helped improve operating margins to 8.8% of sales last year, from 4.2% in 2006. Management is predicting 20%-30% EPS growth in 2008 on a cautious 2.3% increase in revenues -- no bogey here.

In the sand trap
At the retail level, Golfsmith continues to struggle, big time. The company grew sales 8% last year. But profits slipped into the red, and future prospects are decidedly murky -- the stock is trading at only $2 a stub. While manufacturers can excite players with new technology, retailers are stuck competing on price. This is a crowded field, with Golfsmith competing against Golf Galaxy and PGA Tour Superstores. There may be too many U.S. retail outlets already, and the soft economy doesn't bode well for golfing retailers in the near term.

Of the pure plays in this grand game, Callaway seems to occupy the most enviable position. But golf can be a fickle business. Foolish investors may wish to stick with companies like Nike or Fortune Brands. They have a strong presence in the game, but they're diversified enough to post a solid score, even when the domestic side of this industry gets stuck in the rough.

Related Foolishness:

• I Like Big Moats and I Cannot Lie
• Stocks for Dad: Callaway Golf
• The Best Stock-Picking Strategy